Posts Tagged ‘private money’

Private money can be used in a wide variety of real estate transactions. You can use it for buying the property, for rehabbing, for holding costs, or for marketing costs. In some parts of the country, you can borrow money privately for $20,000 – $50,000 and be able to pay for the purchase of the property because the price of houses are cheap. But in areas such as Seattle, where  the price of houses are so high, they are in the $200,000 – $500,000 it would be hard to fund these deals with private money. You will need to either find someone that has that kind of money available or put together a group of people and pool their money to buy the property. However, if you utilize private money in conjunction with creative real estate strategy like Subject To, Seller Financing, Lease Option, etc. it will be more doable to buy these high price houses. Then you don’t need to borrow a large amount of cash to fund these deals. There are so many people out there that have $20,000 – $50,000 that they can lend compared to $200,000.

When I buy a property that is in the $300,000 dollar range, I typically do Subject To so that I don’t have to pay off the underlying loan right away and then I borrow $30,000 in private money to pay for the closing cost, rehab cost, pay the underlying mortgage payments, and marketing cost. This allows me to buy the property with as little cash requirement as possible to cover all the expenses. And sometimes, I am able to put some cash in my pocket when I buy the property. This is a phenomenal way of utilizing private money.

So the more tools you have in your tool belt the better for you. Every deal is different. You need to use the tool that works for specific deal to get a better result. Same with private lender. You need to match them with the right property.  When you do this, then your private lender will be happy and everyone will be happy. You also need to tell your private lender where you are planning to use the funds so there is no confusion as to whether you spend it for something else.  Make sure that you spend that money wisely and accordingly because the worst thing that could happen is you run out of money to finish the project or not able to pay the mortgage payments and you default on the loan. Private money is available to you so that you can do the things you need to do to the property without having to use your own and be able to sell it quickly and make a profit.

Private money is different from hard money. Hard money is people who are in the business of lending money. They lend money to real estate investors on a short period of time (3-12 months), they charge a high interest rate (12% – 20%) as well as points (2-5 points) upfront. And they only lend up to 70% Loan-To-Value (LTV).

Private money on the other hand is people who are just looking to get a higher rate of return on their money that they don’t normally get somewhere else. If they have money on savings or Certificate of Deposits that are only earning  3% a year and you offer to pay them 6%, they would more likely to want to invest with you. The added benefit to them is the fact that their money is secured by real estate so they feel like they have a better control of their investment. And they don’t charge points upfront. 

Also with private money, they are not short term. They want to keep their money invested for as long as possible and don’t like to turn it over and over to where you pay them back shortly. With hard money, they like to turn it over immediately because they make money upfront plus they are earning interest.

When you work with private lender, you can design your own program that works for you. You can set your own terms whether you want 6 months or 60 months, you can set the interest rate that you want to pay 6% – 12%, whether you want to pay interest only or fully amortized, and whether you want to make monthly, quarterly, annual, interest accruing, or balloon payment. Once you decide on your private lending program, then you can match your program with the right private lender.

That’s the benefit of working with private lender versus hard money lender. You have more flexibility and you’re not subject to their own criteria. They are typically more lenient than hard money lenders and so they are much easier to work with. They don’t require credit check like most hard money lenders.

When you utilize private money in your real estate business, it allows you to take your business to a new level. It allows you to leverage other people’s money without having to use your own or use your credit. There is no limit on how many properties you can buy. Unlike banks, you are limited to the number of loans that you can get which limits your ability to buy more properties.